Thank you, Commissioner Reinsch and Commissioner Bryen, members of the Commission. It is my pleasure to speak before you today regarding US export controls and technology transfers to China. First, I would like to respond to the Chairmen’s questions regarding export controls. My comments are based largely on research and analysis conducted in conjunction with the bipartisan Study Group on Enhancing Multilateral Export Controls for US National Security, a congressionally mandated effort that completed its work last year, as well as prior studies conducted on behalf of the Office of the Secretary of Defense (OSD) on ways to reform the US export control system. In addition, I have been asked to discuss the findings from an earlier study on US commercial technology transfers to China conducted on behalf of the Bureau of Export Administration a few years ago but which remains relevant to US-China relations today.

Before I continue, I would like to make clear that the views presented here are my own and in no way represent US Government policy or a position by the Henry L. Stimson Center. That said, let me turn first to the issue of export controls.

EXPORT CONTROLS

As you know, I was originally scheduled to present this testimony on the morning of September 12th. The horrible events that occurred the day before have changed much of the American political landscape and, in particular, how we view national security. However, the impasse over domestic export control reform remains largely unchanged by these events, and it is unclear whether our allies and friends abroad have substantially altered their views on enhancing multilateral export controls as a result of September 11. While this is understandable given other more pressing security concerns, the problems raised by outdated export controls prior to 9-11 remain unresolved and the issue awaits serious attention. Therefore, the testimony that follows first outlines the challenges to, and proposed solutions for, export control reform that existed prior to the September attacks and then touches on the challenges as well as opportunities for reform that the post 9-11 security environment presents.

The World Before September 11

US and International Views on Export Controls
In the post-Cold War era (which, I would argue, ended the morning of September 11), US attitudes and foreign perspectives on export controls evolved, but not necessarily in the same direction. Although export controls remain vital to US national security, the many challenges posed by the uncertain post-Cold War security environment presented three key dilemmas that policymakers have yet to fully address:

The lack of a principal, unifying threat

The increased difficulty in implementing and enforcing traditional export controls in a global economy

A breakdown in the consensus over how to balance security and economic interests in the post-Cold War world

Let me briefly address each of these problem areas and how they affect US export controls, international views, and overall US national security interests.

Lack of a Principal, Unifying Threat
The reality before September 11 was that the United States and even our closest allies did not agree on which states pose a threat. It is for this reason that the successor regime to COCOM (the Cold-War era Coordinating Committee on export controls) relies on national discretion to implement multilateral export controls on conventional arms and dual-use technologies. Although there was more or less agreement on the threat posed by what the United States termed rogue states (North Korea, Iraq, and Libya), there were and are numerous “gray area” states on which no consensus exists (e.g., Iran, Israel, India, Russia, and China). If anything, the latter list has grown since 9-11.

To man, China represents the most difficult case in this regard. Although many Europeans and Asians are wary of China’s growing power and at times questionable trade relations with Pakistan, Iraq, and other states, there is far less concern among European allies over China as a potential threat than exists in the United States. This debate, as this Commission is fully aware, also complicates many facets of US domestic policy toward China. The result is a lack of consensus on how to deal with China by means of US or multilateral export controls.

Effects of Globalization
An increasingly global economy also presents many new challenges for managing export controls. These include:

• Newly emerging forms of technology transfer (e.g., increased levels of global research and development) ¹

• Growing numbers of global suppliers of high-tech and defense-related items, technologies, and know-how (including the most advanced as well as less-capable, but often still lethal, technologies)

• Dissemination of, and increased dependence on, dual-use technologies

• More rapid technological innovations (e.g., microchip capacity)

• Faster-paced international business cycles (e.g., just-in-time delivery)

As a result of these global trends, the United States’ ability to deny foreign technology acquisition is diminishing, unilaterally or in concert with allies.

At the same time, the US military is becoming increasingly dependent on dual-use, commercial off-the-shelf technologies (COTS). Moreover, defense planning documents such as Joint Vision 2010/2020 rely on increasing levels of interoperability between US and allied military forces. These policies are designed to leverage the very same effects of globalization that challenge export controls, presenting policymakers with a difficult dilemma.

Balancing Security and Economic Interests
The most critical challenge to export controls, I would argue, is the breakdown in the consensus over how to balance national security and economic interests. Export controls have always required an economic tradeoff for the sake of increased security. This calculation, however, has changed with the end of the Cold War and with the emergence of an increasingly globalized economy. Now the costs of export controls can result not only in greater economic sacrifice than ever before but also in significant defense-related costs. As a result, there is no longer agreement on where the proper cost-benefit balance lies, nor on how it can be achieved through export controls.

Two general schools of thought exist in the US: the traditional notion that national security is enhanced by denying foreign access to advanced technologies and the newer strategy that emerged in the mid- to late-1990s of maintaining a technological lead as the primary means of protecting US national security in the post-Cold War world.² The old model endures, but is increasingly challenged by the post-Cold War security environment, weakened by the effects of globalization, and criticized by US allies and others as hopelessly outdated.³ However, proponents of the new model have failed to convince influential skeptics of the need for a wholly new approach to regulating export controls that their model for enhanced security would require.

This conceptual divide has repeatedly obstructed US export control reform efforts and has created a high level of distrust between and among US Government regulators and industry executives. Long-stalled US reforms, particularly on munitions, also have led to increased frustration and concern on the part of US allies in Europe and elsewhere.

Implications for US National Security and Economic Competitiveness
Due to different US and allied views, approaches, and policies on China and other “gray area” states, the diminishing effectiveness of the traditional export control-by-denial policies in an era of globalization, and the need still to find a new balance between security and economic interests, US and multilateral export controls have become stagnant and, therefore, less effective than they ought to be. As a result, US national security interests are not being well-served and may be undermined over the long-term if these issues remain unresolved.

Divergent approaches to export controls put a serious strain on US-allied relations (prior to the September attack), which could have serious long-term repercussions. Because US policies and those of even our closest allies differ with regard to China and other states, US export control policies in many ways treat allies the same way as problem states. This is due to US concerns about the possible transshipment of advanced technologies to states (which the US may singularly view with concern) via allies and others who do not share the same threat perceptions. This approach obviously rankles allied leaders who resent the charge that their export control policies and processes, though in some cases different, are not as effective. In addition to aggravating US-allied relations, this approach is counterproductive to US efforts to persuade allies and others to “control up” in an effort to harmonize allied export control policies.

The 17 reforms that make up the Defense Trade Security Initiative (DTSI) agreed to in 2000 by the Departments of Defense and State, plus reforms to dual-use export controls achieved over the last several years, have been designed to better differentiate between exports to allied and less-friendly nations. But, in many ways, there remains little distinction. The longer this situation continues, the more likely there will be unintended but harmful consequences for US-allied relations and overall US national security interests.

In fact, Europeans have grown skeptical of US reform initiatives. Some do not believe that the United States is prepared to deal with Europeans and the EU as partners, while others view the DTSI at least in part as a “buy America” program or an effort to slow European integration and defense restructuring. This, in addition to differences of opinion over how well the current US and multilateral export control regimes work, had diminished the level of trust between the United States and its allies in Europe prior to September 11.

As a result, many transatlantic conversations have raised the possibility of a “Fortress Europe” —the idea of a united European defense establishment large enough to compete with the US defense industry. This remains a very real concern for long-term US security interests. The need for European companies to be able to compete with what they view as a “Fortress America” is discussed in response to what is perceived abroad as outdated and overly restrictive US export control policies that limit transatlantic trade, particularly European investments in the US defense sector. These frustrations, particularly with US arms export control policies, have led some foreign defense firms to “design-out” or to seek alternatives to utilizing US components in their defense items.⁴ Obviously, this situation is troubling and, left to fester, would undermine long-term US national security and economic interests.

Thus, the real danger lies in doing nothing. There is an urgent need for a new consensus that deals with the challenges posed by globalization and now also the post-9-11 security environment. In order to be effective, however, export control reforms must be coordinated with US allies and be applicable on a global scale.

The World After Sept. 11

Although crafted almost a year ago, a new framework proposed by the Study Group on Enhancing Multilateral Export Controls for US National Security would address the challenges outlined above and also, I believe, the challenges posed by the present security environment. Increased international good will and cooperation in the US-led effort to stem Al Qaeda’s terrorist activities may provide additional opportunities for significant reform as well as some new and unforeseen challenges.

What Can Be Done?
In the short-term, some of the efforts underway to reform US export controls prior to September 11 should be enacted. These include an updated Export Administration Act and the implementation of key provisions in the Defense Trade Security Initiative (such as the review of items and technologies on the Militarily Critical Technologies List), though with a new eye toward terrorist capabilities. These reforms will help address some present-day obstacles to achieving more effective export controls, but they will not be sufficient over the long-term to deal with more fundamental issues. Still, as two comprehensive studies on exports controls completed last year concluded, real reform will require a coordinated effort by the executive and legislative branches of government and a more cooperative relationship between government and industry to be successful.⁵

In order to enact more substantial, long-term reforms, however, the United States must also lead the effort to improve multilateral export controls. The Study Group on Enhancing Multilateral Export Controls, a congressionally mandated, bipartisan effort authorized in the FY’00 defense bill and charged with achieving a consensus on enhancing multilateral controls, reported its conclusions, recommendations, and a strategy for reform last April. As no less than three members of this Commission participated in the Study Group’s efforts, I will dispense with a long description of the Study Group’s makeup and findings. Rather, let me focus on the Study Group’s recommendations for export control reform, which I believe are relevant to the threats we face today as well.

In short, the Study Group concluded that a three-pronged approach to reform is needed. The first recommendation addresses improvements to existing multilateral export control regimes, the second introduces a new concept for security to be implemented by what was termed a “coalition of the willing,” and the third recommendation calls for a partnership for change.

The first step in enhancing US national security through multilateral export controls, as agreed by the Study Group, is to improve the inner workings of the Wassenaar Arrangement and other nonproliferation regimes. In particular, the Study Group suggested that short-term improvements to Wassenaar should include measures such as:

• instituting more robust information exchanges;

• procedural reforms (including the establishment of an executive council to improve coordination among the control regimes, a catch-all provision, and agreement on a stronger no-undercut rule); and

• an enhanced role for Wassenaar’s Secretariat.

The Study Group also recommended that, over the long term, consideration be given to merging Wassenaar and the other nonproliferation regimes into a single body, but only if this is deemed, on balance, to improve the overall functioning of multilateral export controls.

All of these measures also would aid in the renewed effort to keep weapons of mass destruction out of the hands of terrorists.

A New Framework for Improved Multilateral Export Controls
An entirely new proposal put forward by the Study Group was a recommendation that a new, supplemental framework for coordinating multilateral export controls be formed among a “coalition of the willing” —that is, close partners with the United States who would agree to implement common export control policies and procedures in return for a more cooperative defense trade relationship. This new framework would address the challenges and dilemmas described above by providing incentives (primarily closer defense cooperation) for allied states willing to devise a common export control approach toward nations and/or end-users outside the framework.

The strategy for instituting the proposed supplemental framework would require both domestic and multilateral reforms to arms and dual-use export controls. But by building upon common values and a shared interest in enhanced defense cooperation —particularly now, in the face of international terrorist threats against the West— the United States and its prospective partners could forge a consensus on technology transfers that allows freer access to technology within the framework and more effective controls over transfers of the most critical technologies to parties outside the framework. In other words, the goal of this new arrangement would be the oft-cited “higher walls around fewer items.” This would only be possible, however, if the partners agree on, and effectively enforce, identical controls over critical technologies to third parties.

What made the Study Group think that an arrangement such as this is possible is the fact that the European defense establishment has undergone a transition similar to the period of consolidation that transformed the US defense industry.⁶ Just as the effects of globalization and the consolidation of the US defense industry led to calls for export control reforms in the United States, a similar round of consolidations in Europe has resulted in efforts there to update export controls. In fact, having followed on the heels of the US, and due to the transnational character of European political, legal, and economic institutions, the European defense industry transformation has resulted in arguably more far-reaching and significant export control reforms than have thus far been possible in the US.

Three events over the last few years are significant in terms of European export control reform. In June 1998, all 15 European Union states agreed to a Code of Conduct on conventional arms exports. Although a politically (rather than legally) binding agreement, this document nevertheless provides a common EU standard and set of criteria for selling arms exports within and outside the European Union.

This was followed not long after by the signing of a Letter of Intent (LOI) agreement in July 1998 by the six European defense ministers representing the United Kingdom, France, Germany, Italy, Spain, and Sweden to cooperate on restructuring their defense industries under a common framework. The LOI agreement, in turn, led to the formation of a six-party Framework Agreement, a legally binding document signed in August 2000 by these same six leading arms-producing states.⁷ In so doing, the six nations agreed to implement significant changes to their respective export control policies, processes, and procedures by simplifying and harmonizing export controls for militarily useful goods in order to facilitate greater defense cooperation. The agreement also includes measures to streamline procedures for sharing classified information and other information exchanges to allow joint defense-related research and development. The goal: to harmonize military requirements, defense production, and export controls among the six major defense industrial states so as to develop a European defense market and to promote the internationalization of European defense industries. From visits to several European capitals in conjunction with the Study Group and conversations since that time, I can assure you that this effort is real, and that it is well underway.

In fact, it became clear that many of the export control issues that the United States has only begun to grapple with are already real-world realities in Europe due to the close cooperation and increasing economic and political integration of European institutions. This has forced European leaders to come up with practical solutions to many of the same dilemmas that US policymakers now face (for instance, how to deal with large numbers of diverse foreign nationals working on a single large defense program). US national security could benefit from similarly innovative approaches and by building upon the reform efforts already underway in Europe in conjunction with the Framework Agreement. This premise underlies the strategy outlined by the Study Group for instituting a new framework for multilateral export control reforms, which will be successful only if built upon these foundations.

Finally, in addition to this new multilateral framework, the Study Group recommended that simultaneous reforms be made to the US export control process in order to enhance US security and provide the necessary confidence —in both domestic and international partners— in the US commitment to fully implement the proposed new framework. To achieve these goals, the Study Group concluded that a coordinated effort and partnerships between the various US Government agencies with export control jurisdiction, the White House, Congress, and industry would be essential to success.

Prospects for Success Post-9-11
Since the harrowing events of September 11th, the prospects for reaching agreement with a coalition of willing states on a new multilateral export control framework have only improved. The United States and our NATO allies have a renewed common cause and already have enacted changes to export control regulations to facilitate defense trade. Also, the sharing of intelligence —which the Study Group considered a key element for more effective multilateral controls— has improved significantly since the terrorist attacks on the US. Moreover, other states, whose participation in the framework was deemed unlikely (e.g., Russia), could now conceivably become constructive partners in this new framework. The shared, and heightened interest in preventing weapons of mass destruction and armaments from falling into the hands of terrorists and rogue states may also provide a good starting off point for enhancing the nonproliferation regimes and Wassenaar Arrangement.

Also, it is important to note that while a clear, and more or less unifying, threat has emerged in the form of Al Qaeda and other international terrorist organizations, the framework is not dependent on a common enemy but on shared interests and commitments. Therefore, it should be sufficiently flexible to address changing international security threats.

This is a very brief overview of the Study Group’s recommendations and how they apply to today’s environment. I would be happy to go into greater detail during the Q&A period. Let me now turn to the other side of the coin, technology transfers. Specifically, US and foreign commercial technology transfers to the People’s Republic of China.


TECHNOLOGY TRANSFERS TO CHINA

Globalization is clearly a boon for countries wishing to quickly acquire and possibly advance in commercial as well as defense-related technologies. The ever-wider dissemination of dual-use technologies around the globe provides an increasing supply of militarily useful and enabling technologies that are becoming more and more difficult to regulate under the present system. Moreover, not all forms of technology transfer of potential significance are captured by export controls. Once again, China is a prime example of these trends.

According to research published by the Department of Commerce’s Bureau of Export Administration (BXA), US and foreign high-tech firms operating in China were (and likely still are) being pressured to transfer commercial technology in return for market access in China.⁸ In addition, this research identified an offset and form of technology transfer new to the China market: the establishment by foreign high-tech firms of research and development (R&D) centers in China. Both have potentially serious implications for US economic competitiveness and national security.

Findings on US Commercial Technology Transfers to China
It is clear that the transfer of US technology was –and, I believe, likely still is– included as a type of offset in US-China joint venture agreements.  This transfer of US technology is not “forced” on US or foreign investors, as is sometimes suggested, for the simple reason that no foreign company is required to invest in China and can refuse technology transfer-related offset demands by walking away from the investment opportunity. That said, transfers of US technology sometimes are “coerced” to varying degrees by making them an informal condition of trade or investment in China.  In other words, the reality of doing business in China has frequently required US high-tech businesses to accede, to a greater or lesser extent, to Chinese demands to transfer technology, advanced equipment, and/or know-how that these companies might not otherwise be willing to bring to the China market. 

This was clearly the case across the three industry sectors studied as part of the BXA report: automotive, aerospace, and electronics.  For example, according to an internal report of one of the big three US automotive companies, that company’s offer to establish a “technology development center” as part of their investment in a large joint venture in China was the key to beating out other foreign competitors in gaining Chinese government approval of the joint venture.   Other companies and industry analysts interviewed for the study, and according to numerous press reports, lost similar bids to foreign competitors who were willing to transfer some or comparatively more technology to close a deal.  It is these types of transactions that the study was intended to document.  Although much of the evidence remains anecdotal, the indications of these types of demands on foreign investors are persuasive.

Moreover, these findings mirror conclusions reached in the last six annual National Trade Estimate reports published by the Office of the US Trade Representative (1995-2001).  These reports state explicitly that “…the Chinese Government routinely seeks to obtain offsets from foreign bidders in the form of local content requirements, technology transfers, investment requirements, counter-trade or other concessions, not required of Chinese firms.”⁹ The 2001 report goes on to describe the problem:

For example, regulatory officials have on occasion advised foreign equipment suppliers that they need to transfer technology, establish a joint venture with a local partner, and/or establish manufacturing facilities if they wish to supply equipment to China for certain new telecommunication services. Sometimes, regulatory officials have gone so far as to demand the commercial terms of such technology transfer agreements, which is totally outside the purview of their stated responsibilities. These informal requirements serve as administrative barriers to trade.

A Key Finding:  Joint Research and Development in China
In addition, high-tech firms wishing to invest in China have been asked, prodded, suggested to, or otherwise informed of the need to establish an R&D center in China. Numerous companies have complied. According to Chinese sources, there are nearly 100 foreign-sponsored, high-tech research and development centers in China, and there may well be more than that.¹⁰ Many of these centers or programs have been established over the last several years and are sponsored by leading high-tech multinationals such as General Motors, Microsoft, Intel, Motorola, Nokia, and others. These programs or centers typically are set up in partnership with a Chinese enterprise and/or university.¹¹ This is a potentially significant development and constitutes a relatively new trend in US and foreign investment in China. 

Foreign investors in growing numbers seem willing to conduct research and/or develop new products or processes with their Chinese partners. How significant is the emergence of foreign-sponsored R&D in China? It is unclear. Much, although certainly not all, of this joint R&D is being conducted by students, scholars, or engineers at some of China’s leading, well-known universities (including Peking and Tsinghua Universities, Fudan University in Shanghai, Zhongshan University in Guangzhou, and elsewhere).  Other joint R&D projects are part of, or directly related to, the work of the joint venture with which they are affiliated.¹²   Little information is available on what, if anything, these ventures have produced.

Moreover, the nature of what constitutes joint R&D differs in each case and depends on the foreign and Chinese partners involved.  Most of what is termed joint R&D appears to be applied research, often constituting the “localization” of foreign products to suit the domestic market.¹³   Some “R&D” labs or centers are established primarily for the purpose of training Chinese employees to master foreign technology, equipment, and management techniques.¹⁴ Obviously, much more research in this area is needed in order to understand exactly how these centers operate, how these relationships will affect US economic and security interests, as well as how they will impact China’s own economic and technological development.

In the meantime, US companies currently engaged in collaborative research in China run the risk of potentially losing the monetary and technological gains from their investments due to limited intellectual property rights and discriminatory provisions regarding the rights and obligations of foreign partners in China that favor the domestic partner. So, why are US and other foreign high-tech firms still in China and acceding to demands to transfer technology? The answer stated most often was that a company simply could not not be in China, lest a competitor had the chance to gain a foothold first.

What Motivates Technology Transfers to China?
As you know, doing business in China has never been easy. Numerous tariff and non-tariff trade barriers exist that make selling most foreign-made products to Chinese consumers a difficult, and in some cases commercially unviable, prospect. China’s efforts to develop indigenous high-tech industries include foreign investment policies that are selective and restrictive in the type of foreign investment that is allowed and officially encouraged.  Over the years, there has been an increased emphasis on industry-specific investment and high-technology imports. 

Nonetheless, China remains a buyer's market.  The potential of this single market is perceived still to be unparalleled, and the prospect of selling most anything to over one billion people, in one place, is irresistible to many companies.  The leverage afforded by this enormous potential market allows Chinese officials frequently to play foreign competitors against each other in their bids for joint venture contracts and large-scale, government-funded infrastructure projects in China. Unfortunately, many companies discover only later the reality that the size of China’s market is in truth not that remarkable when one discounts the majority of the population that is extremely poor and the 100 million-plus floating population. This same type of miscalculation regarding the potential Chinese market has plagued foreign investors in China for centuries.¹⁵

Yet, while there have been numerous complaints registered by US companies regarding unfair trade practices in China, many companies are hesitant, if not unwilling, to complain publicly or even privately about the numerous difficulties inherent in doing business in China, including demands for technology transfers.   This is in part due to the high cost —both financially and politically— of exiting the market. It is not surprising then that, despite the fact that the majority of industry representatives interviewed for the study clearly stated that technology transfers were the price of doing business in China, most representatives also were optimistic about their future business prospects in China and did not think the entry “price” had yet become too high.   Apparently this optimism remains unbowed despite continued unprofitable China ventures and a slowing Chinese economy.¹⁶

Why? Initially, US and other foreign investors were more interested in trying to “gain a foothold” or to “establish a beachhead” in China than in realizing near-term profits or even gaining more than limited access to China’s market.  Therefore, if Chinese policies demanded a manufacturing joint venture and technology transfers in exchange for investment approval and market access in China, many companies stood ready to make the deal.  This is not to say that these firms were or are unconcerned about giving away proprietary information or about China’s infringements of intellectual property rights, or even China’s capacity to become a competitor in their own industry sector.  Rather, most companies seemed to think either that the potential short and long-term gains were worth the risks, that many of the problems would be resolved once China gained WTO membership, or that the problems were more or less easily prevented by taking proper precautions. 

In terms of joint R&D, most companies also did not view these programs and other “required” technology transfers as threatening to their competitive edge or that of their industry. While each circumstance differs and this may all be true, it is the cumulative effect of these independent decisions that is of interest and, potentially, of concern down the road.

Implications for US National Security Interests and US-China Relations
Though troublesome, the trends and dynamics described above are observed in other developing countries, and foreign investors from other nations are experiencing similar pressures in the China market.¹⁷   The extent to which US firms agree to transfer technology to China in exchange for market access is a judgment call each must make.  No company, as I have been told many times during interviews, willingly transfers its most advanced or latest-generation technological capabilities.  These same companies, however, may be willing to transfer less-than the latest generation technology that is nonetheless more advanced than would generally be appropriate for the less-developed China market.  Some do; others resist.  It has clearly been the objective of Chinese authorities and joint venture partners to acquire foreign advanced technologies in this way, and the cumulative effect could contribute to the creation of an economic competitor at more rapid pace than might otherwise appear. One well-known success story that continues to impress (or give one pause) is the Chinese computer company, Legend.

Legend Holdings, Ltd., has become not only the number-one seller of personal computers in the PRC, but now ranks just below Japan in sales to the Asia-Pacific region and is poised to expand its international reach.¹⁸ The question is whether this success is in spite of, or because of, foreign competitors in the China market such as Hewlett Packard, IBM, Dell, and others. Obviously, as a leading state-owned enterprise, support from the Chinese government as well as smart growth strategies have helped leapfrog this company ahead of more advanced, foreign computer makers in the China market. But the strategy that Legend has followed of collaborating with many different Western high-tech competitors at once also has been essential to the company’s success and is being duplicated in other Chinese industry sectors.

Does this matter? It does if Legend’s path to success can be replicated across other critical high-tech sectors, particularly if over a similarly short period of time. As this case makes clear, the question we must ask is not whether or when Chinese enterprises may reach technological par with the United States and others (which is probably a long way off); the critical question is when will China acquire technological capabilities good enough to compete? As a recent study on China’s commercial technological development concludes, “Simply because China’s technological capabilities will lag those of the United States does not mean…that China could not present a serious military challenge to the United States.”¹⁹

A primary motivation for requiring foreign-sponsored joint R&D ventures, centers, or labs in China has been the integration, compatibility, and absorption of foreign technology. In some cases, foreign investors have been asked to make foreign technology and equipment compatible with Chinese technical specifications or standards.²⁰ This also raises a serious question whether (or not, in the case of Legend’s foreign competitors) the technological advantage that foreign standard-bearers bring to the China market will translate into a dominant market position.

Nonetheless, although China could stand to gain significant technological know-how and advances in critical high-tech industry sectors as a result of foreign technology transfers and joint R&D programs, this is by no means assured, and should not be assumed. To date, China’s overall record of indigenous technological development and innovation has been spotty and sporadic at best.  This is despite the huge inflow of foreign direct investment (more than any other developing country and second only to the United States) and the technology transfers that often accompany this.

Several central government programs have been established to take advantage of foreign investment and technologies and to promote domestic technology development and innovation.  As part of these programs, experiments with state-sponsored high-tech development zones, national engineering research centers (NERCs), high-tech incubators, and other programs have been instituted in an effort to link China’s research community with both Chinese entrepreneurs and foreign investors. Yet, although Chinese acquisitions from Soviet technology transfers made clear that transfers do not necessarily translate into indigenous technological capabilities, many bureaucratic, political, and economic barriers to innovation remain.²¹   Even in cases where Chinese ventures have been successful in manufacturing technologically advanced products (e.g., airplane, automotive, or electronic parts), they typically lack the cradle-to-grave capabilities and processes necessary for a modern successful enterprise or industry.  As a result, roughly half of China’s exports still are produced by foreign-invested enterprises (either joint ventures or wholly foreign owned enterprises).²²  

Thus, the progress of foreign-sponsored or joint R&D centers in China could provide critical indications of China’s modernization and ability (or inability) to assimilate new ideas, methodologies, and technologies. In fact, a lack of progress despite possibly significant levels of technology transfer would also be revealing.²³

Technology transfers to China and the success or failure of foreign R&D centers will likely have important economic, political, and security implications for US-China relations. Most immediately, China’s commitment to the WTO will be tested through its approach to foreign R&D centers, the establishment of which China has since explicitly agreed not to use as a quid pro quo or condition for further opening of its markets to foreign investors.²⁴ Intellectual property rights and the rule of law in China also will be tested by these centers, as will US and multilateral export controls. More generally, the US-China balance of trade could be affected over the long-run if China is able, in part through these collaborations, to more rapidly develop its high-tech industry sectors and thereby become surprisingly competitive in these industries both within China and internationally. Finally, the success or failure of these centers could also indicate the degree to which China’s economic and industrial reforms will aid efforts to modernize Chinese defense industrial enterprises.

Although both export controls and technology transfers will continue to pose challenges for US-China relations, there is some reason for optimism.

Last year, the US Government sanctioned a Chinese entity for violating a November 2000 bilateral agreement on export controls governing missiles and weapons of mass destruction. Although the apparent violation is troublesome, sanctions levied against the entity in question allow US-China relations to continue on a more or less even keel while dealing with this particular problem. Given the roller-coaster nature of Sino-US relations over the years, this represents progress and, I think, a maturing of the relationship.

Also, a bilateral agreement reached in November 1999 that led to China’s recent accession to the World Trade Organization is promising. The agreement includes a specific commitment by China not to condition approval of foreign investments on the willingness of US and other companies to transfer technology, set up an R&D center, and so forth. This, too, is progress.

Neither agreement, however, will be the last word, and there is no doubt that disagreements will continue to challenge US-China relations for years to come. In particular, China’s joining the WTO will not solve all the foreign investment problems faced by American and other companies overnight (although it is often presented this way). Continued wariness and caution in terms of technology transfers will be necessary. Yet, China’s willingness to participate in multilateral arrangements that regulate trade is encouraging. Encouraging this is in the US national interest in terms of both economic and security concerns.

Conclusion

US export controls and technology transfers play a vital role in protecting US national security. Yet, neither can be too restrictive nor too liberal if they are to be effective. While dual-use, commercial technology transfers to China can enhance investment opportunities, they are also a potential concern for US national security, as several high-profile cases have shown. Export controls as presently constituted, however, are not well-designed for the on–the-ground reality in China and elsewhere. Perhaps more importantly, nor can they provide the type of information necessary to fully understand the implications of these transactions.

There are ways, I would argue, to reform US and multilateral export controls such that more information about these transactions could be available and provide a much clearer, more comprehensive picture of the cumulative effect of China’s (and other states’) technology transfers and acquisition programs, patterns, and priorities in a way that would not unduly impede international trade. Anything of this sort, however, would require wholesale reform of the current system and, more importantly, a collective political that thus far has been lacking. Perhaps, in the aftermath of the September tragedy, significant reforms will be possible. But it will require US commitment and leadership. Although the Bush administration has sounded its support for export control reform, a new and vigorous effort is needed to move past the current impasse and to establish new forms of international cooperation to better protect the transfer of critical technologies and to enhance US national security. Otherwise, we will continue to operate in the dark and wonder what it is we can’t see.

I would like to thank the Committee for providing me this opportunity to describe some of the work that I have been involved in over the last few years. I hope that it has been helpful.  These complex issues have been horribly oversimplified for the sake of brevity, but I would be happy to answer any questions you may have on either export controls or technology transfers to China.  Thank you for your time and your attention.


ENDNOTES

1. Recent studies on globalization have found a significant rise in global research and development (R&D) by multinational corporations. In addition to increased R&D by foreign companies in the United States, a recent Department of Commerce report finds that US company expenditures abroad on R&D are also increasing, particularly in newly industrializing economies such as Singapore, Brazil, and Mexico. See Donald H. Dalton, Manuel G. Serapio, Jr., and Phyllis Genther Yoshida, Globalizing Industrial Research and Development, 2nd ed. (Washington, DC: US Department of Commerce, September 1999); and International Science and Technology: Policies, Programs and Investments (Washington, DC: US Department of Commerce, December 2000).

2. This strategy is outlined in a seminal report by the Defense Science Board. See US Department of Defense, Office of the Undersecretary of Defense for Acquisition and Technology, Final Report of the Defense Science Board Task Force on Globalization and Security (Washington, DC: US Government Printing Office, December 1999).

3. As a former director of DARPA points out, “It is probably not possible to implement more effective export controls by tightening controls of all advanced technology. The unclassified, open nature of most of the research and the wide participation in development precludes this option. In addition, since most of the technologies are not exclusive to the United States, this strategy would seriously disadvantage our industry in the international marketplace. Larry Lynn, Forecasting Critical Military and Commercial Technologies: Potential Long-term Challenges for Export Controls, Study Group on Enhancing Multilateral Export Controls for US National Security, Working Paper No. 5, March 2001, p. 21.

4. In October 1999, the president and CEO of DaimlerChrysler Aerospace (DASA, which is now part of EADS) reportedly wrote to then-Under Secretary of Defense Jacques Gansler about DASA’s intent to reduce the company’s overall reliance on US components in order to provide greater reliability in supply. See FDCH Political Transcripts, “House Committee on International Relations Holds Hearing on Munitions Export Licensing,” March 28, 2000; Joseph C. Anselmo, “Hamre: Export Delays Hurting US Alliances,” Aviation Week and Space Technology, November 8, 1999, p. 34; and US Department of Defense, “Fletcher Conference on Strategic Responsiveness: Remarks as Delivered by Deputy Secretary of Defense John J. Hamre,” press release, November 3, 1999.

5. The Study Group on Multilateral Export Controls reached the same conclusion as the CSIS Military Export Control Project working group. See, respectively, The Henry L. Stimson Center and CSIS, Study Group on Enhancing Multilateral Export Controls for US National Security: Final Report, April 2001 and Center for Strategic and International Studies, Technology and Security in the Twenty-First Century: US Military Export Control Reform, CSIS Panel Report, May 2001.

6. For an overview of this process and its effects on transatlantic relations, see François Heisbourg, From European Defense Industrial Restructuring to Transatlantic Deal?, Working Paper no. 4, Study Group on Enhancing Multilateral Export Controls for US National Security (Washington, DC: The Henry L. Stimson Center/CSIS, February 2001).

7. The Agreement Concerning Measures to Facilitate the Restructuring and Operation of the European Defence Industry or “Framework Agreement” was signed at the Farnborough Air Show on 27 July 2000.

8. See Kathleen Walsh, US Commercial Technology Transfers to the People’s Republic of China (Washington, DC: Office of Strategic Industries and Economic Security, US Department of Commerce, January 1999). Much of the information contained in the following section is based on this study.

9. See National Trade Estimate Report on Foreign Trade Barriers: People’s Republic of China, 1995-2001.

10. This figure, from September 2000, was reported by China’s Ministry of Foreign Trade and Economic Cooperation (MOFTEC).

11. Richard P. Suttmeier and Cong Cao, “China Faces the New Industrial Revolution: Achievement and Uncertainty in the Search for Research and Innovation Strategies,” Asian Perspective, vol. 23, No. 3 (1999); See also Marco Di Capua, “Technology Innovation in China,” paper presented at the Sixth ISODARCO Beijing Seminar on Arms Control, October 29-1 November 1998. For a brief list of foreign high-tech R&D programs in China, see Donald H. Dalton, Manuel G. Serapio, Jr., and Phyllis Genther Yoshida, Globalizing Industrial Research and Development, 2nd ed. (Washington, DC: US Department of Commerce, September 1999), Appendix C, p. 86.

12. Di Capua, “Technology Innovation in China”; and A.T. Kearney, Global Investment in China: A White Paper on the Quest for Profitability (1999)., p. 14.

13. This was the finding of an ATIP study. See Asian Technology Information Program (ATIP), Foreign R&D Centers in China (ATIP97.058), July 9, 1997.

14. Di Capua, “Technology Innovation in China.”

15. For an amusing account of this perpetual problem, see James Surowiecki, “Little Profit in Big China,” The New Yorker, July 16, 2001, p. 31.

16. See A.T. Kearney, Global Investment in China: A White Paper on the Quest for Profitability (1999). According to this report, “Just two out of five participants report that their consolidated China operations are profitable.” More than half, 52 percent of international respondents, have yet to realize a profit in China (see p. 2). This is in line with findings from an earlier white paper published in 1997.

17. David Bennett, et al., China and European Economic Security: Study on Medium to Long-term Impact of Technology Transfer to China, Prepared for the European Commission Directorate General I (July 1999), p. ix.

18. Tyler Marshall, “Little-Known PC Maker Is Legend in the Making,” Los Angeles Times, Business Section, page 1 (September 2, 2001).

19. Roger Cliff, The Military Potential of China’s Commercial Technology (Washington, DC: RAND, 2001), p. 62. This study examines China’s present capabilities in eight major industries: microelectronics, computers, telecommunications, aviation, space, nuclear power, biotechnology, and chemical technology and concludes that “China has significant production capabilities in all but one (biotechnology)…[but] also has significant limitations to its capabilities in all eight” (p. 30).

20. In software and other industry sectors, foreign investors must in some cases alter their technology to conform to Chinese standards. See, for example, Hong Kong Trade Development Council, “Business Alert – China,” Issue no. 3, March 15, 2001, accessible online at http://www.tdctrade.com/alert/ch0103c.htm.

21. Di Capua, “Technology Innovation in China.”

22. Hong Kong Trade Development Council, Market Profile on Chinese Mainland, citing data from China’s National Bureau of Statistics, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), and General Administration of Customs. Available online at http://www.tdctrade.com/main/china.htm.

23. As Richard Suttmeier observes with regard to the emergence of foreign R&D centers in China, “Chinese R&D can benefit substantially from this type of foreign presence, but there clearly are risks, as well, that the most productive and innovative parts of the system will be captured by foreign interests.” See Richard P. Suttmeier and Cong Cao, “China Faces the New Industrial Revolution: Achievement and Uncertainty in the Search for Research and Innovation Strategies,” Asian Perspective, vol. 23, No. 3 (1999); and Eric W.K. Tsang, “A Preliminary Typology of Learning in International Strategic Alliances,” Journal of World Business, no. 3, vol. 34, September 22, 1999, p. 211.

24. See Protocol Language in the “US-China WTO Market Access Agreement,” March 14, 2000, pp. 3 and 227.